Shares of Cognizant Technology Solutions Corporation (CTSH) could see an upside in the coming days due to low probability of immigration bill passing this year. More importantly, the support for outplacement restriction, which is the key draconian provisions in the immigration bill has waned.
The immigration bill has been the key overhang on the shares of Cognizant, which is among the leading companies receiving H-1B visas to bring immigrant workers to the United States. As of June 30, 2013, Cognizant employed about 164,300 people and its has over 100,000 employees working in India.
Immigration reform has into the limelight again after the government shutdown ended as President Obama renewed his call to Congress to take on immigration reform and the Speaker John Boehner didn't rule out the possibility of taking up immigration reform in 2013.
However, given that there are only seven legislative days in November and the Congress is off in December, there is a extremely low likelihood of immigration legislation in 2013.
"With mid-term elections next year, house republicans may not take up the immigration in early 2014 at least till after their nominations are confirmed in the primaries as they risk being challenged by more conservative candidates," Deutsche Bank analyst Bryan Keane said in a client note.
Although, there is potential for Congress to take up the immigration reform in mid-to-late 2014 in order to appease the minority voters, the path to citizenship remains the core issue of contention between the two parties.
If the immigration bill gets pushed out after 2014, there will be a fresh set of congressmen in 2015 which could potentially reset the efforts on the immigration reform.
In addition, two republicans namely Congressmen John Carter and Sam Johnson dropped out of the bipartisan group of "Gang of Seven" which is a setback for the immigration reform in the House.
"No republicans have signed up for the bill and we believe it was just a messagin! g effort and don't expect the version of the bill to proceed," Keane noted.
Minority house leader, Nancy Pelosi and 120 other House Democrats introduced the Senate version of the immigration bill except for the revised border security provisions on Oct 2, 2013.
Meanwhile, the super committee may consider parts of the immigration reform within the budget deal considering revenue potential highlighted by the CBO. However, checks suggest minimal likelihood of getting through.
"In the event immigration reform does get passed, we believe the support for outplacement restrictions has waned as India rolled back two protectionist measures namely Preferred Market Access (PMA) and transfer pricing which will help the US multinationals interested in expanding their operations in India," Keane wrote.
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Also, the Indian government has been lobbying actively, and the issue has been raised by Prime Minister Manmohan Singh in a meeting with Obama and Wipro chairman Azim Premji met US vice-president Joe Biden to raise his concerns.
In addition, Nasscom and US-India Business Council (USIBC), a trade lobby comprising top US and Indian companies as well as the Indian offshore companies have increased their lobbying efforts. Five former US ambassadors to India have written to Senate urging them to rollback the outplacement restrictions.
"We believe the efforts of these lobbying activities along with support from the Fortune 2000 US companies likely diminish the potential for outplacement restrictions in the final bill," Keane said.
Cognizant's headcount grew 1 percent quarter-over-quarter (13.2 percent year-over-year) in the second quarter, with the company adding about 1,600 people. 48 percent of additions were direct college hires with the remaining being experienced hires from within the industry. The company's headcount growth rate could pi! ck up wit! h solid demand environment.
Solid demand environment for IT Services has been driven by regulatory, transformation services, channel strategy and digital marketing as well as emerging technologies namely, cloud, analytics, and mobility.
Given the solid demand environment and waning overhang of immigration bill, the company's ability to gain share and grow faster than the market are solidified.
"We believe CTSH can deliver 20% growth in FY13, above company's current guidance of 19%," Keane added.
Shares of Cognizant have gained 17 percent this year and traded between $60.92 and $90.01 during the past 52-weeks. The stock trades 19 times its 2014 consensus earnings estimate.
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